May 15, 2018 | Collateral Damage

Garth Turner

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics.
Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Realtors made official Tuesday what this pathetic blog has been telling you lately. And look at the words used describe things: “destabilized,” “lowered,” and (my fav) “collateral damage.” The numbers pretty much speak for themselves:

Sales were down on average across the nation by 14%.

April is always better than March. But not this year. Big drop.

60% of Canadian markets are going in reverse.

The price of houses nationally has fallen 11.3% in a year.

The most damage is being done in the GTA and the LM. No surprise there.

Blame the mortgage stress test.

“The stress-test that came into effect this year for homebuyers with more than a twenty percent down payment continued to cast its shadow over sales activity in April,” says CREA’s president. “This year’s new stress test has lowered sales activity and destabilized market balance for housing markets in Alberta, Saskatchewan and Newfoundland and Labrador Provinces,” says the group’s economist. “This is exactly the type of collateral damage that CREA warned the government about. As provinces whose economic prospects have faced difficulties because they are closely tied to those of natural resources, it is puzzling that the government would describe the effect of its new policy as intended consequences.”

What a suite of problems faces housing. The stress test, sure. But also those damn taxes – on Chinese dudes, Albertans with cottages, people with vacation condos, second homes, pied-à-terres or under-utilized lovenests. Layered on is the quantitative tightening of central banks. After almost a decade of slathering liquidity over the economy, they’re now hoovering it up.

And this is what it looks like:

Behold the spike in yield yesterday for the five-year Government of Canada bond. That happened while US Treasuries were also romping higher, causing the stock market to sell off a little as investors resigned themselves to as many as three more rate hikes this year by the Fed. With 10-year, risk-free bonds now paying more than 3%, why take a gamble to get 4% with a stock that could decline in value? So, equities fade.

By the way that bond chart above is meaningful if you have a mortgage renewing this year. The banks’ lending rates are closely tied to the yield on five-year government notes, so this will give you an indication of where things are headed. No, rates are not spiking, exploding or careening higher. It’s more like the water in Grand Forks – every day it creeps up your pant leg a little, and there’s not a thing you can do about it. Except leave.

Clearly that’s what a lot of people are doing. Today’s numbers confirm buyers have retreated during what is normally the peak season for residential real estate. This suggests when spring’s over and the summer doldrums hit, followed by the next icy blast, the market could be further destabilized. Damaged. None of the big factors – the stress test, punitive taxes nor rising rates – will be gone by the end of 2018.

Nor will politicians. The series of blunders being made by governments at all levels is epic. Raising taxes will not lower house prices, for example. And now comes word (C.D. Howe Institute) that provincial over-regulation and municipal gouging have added $168,000 to the price of the average new GTA house and boosted the cost of a new-build in Vancouver a stunning $644,000. In other cities, more pain – an extra $264,000 in Victoria, $152,000 in Calgary and $112,000 in Ottawa.

There’s a reason houses in the States cost a fraction of what they do here, where people make about the same and families are less in debt than they were a decade ago. Keep voting the way you are and we’ll soon be buying yurts.